Separate Entity Commercial Real Estate May Not Be Safe From Creditors

It is a common practice in Wisconsin (and in other states, as well) for a commercial enterprise to separate the ownership of its real estate from its actual operating facilities. For example, a manufacturing concern might set up a separate entity – often, a limited liability company (LLC) – to own and manage the enterprise’s real estate and improvements. For the manufacturing concern, service operation, or other type of business that serves as a “lessee,” the separate corporate structures can make for a “cleaner” balance sheet. The arrangement can also serve other legitimate business purposes.

Attention to Corporate Separation is Important

Careful attention must be given to maintaining the corporate “separateness” of the two entities, however, lest creditors – or in the case of insolvency, a bankruptcy trustee – be able to disregard the firewall that the owners have constructed between the two entities. The dangers were exhibited recently in a decision of a U.S. Bankruptcy Court [Lassman v. Cameron Constr. LLC (In re Cameron Construction & Roofing Co.), 2016 Bankr. LEXIS 4271, 63 Bankr. Ct. Dec. 119 (D. Mass., Dec. 14, 2016)] involving a bankrupt roofing contractor and a property management company, both of which had been founded and owned by the same man.

Because of the inherent risks in the construction industry, a roofing contractor incorporated two separate entities in connection with his business. Into the first, his roofing company, he contributed limited assets – primary equipment required in roofing, as well as several vehicles used in the business. At the same time, he created a separate limited liability “property management” company, which took title to the real estate that housed the roofing business.

Years later, when the roofing business failed and the owner filed for corporate bankruptcy, the bankruptcy trustee filed an adversary action claiming that the assets of the management company should be included in the bankruptcy estate. After a hearing, the bankruptcy court acknowledged that the two companies appeared to be separate corporate entities, noting that the contractor and the management company filed separate tax returns, maintained separate articles of incorporation, issued separate W-2s, and filed separate annual reports. The court said, however, that considering all the circumstances, there was substantial identity between the entities and ordered their assets consolidated for purposes of the liquidation.

The Devil Can Hide in the Details

The bankruptcy court appeared to indicate that if the owner of the roofing company and the management company had paid more attention to separateness, then the court might not have disregarded the separateness of the two entities. The devil can hide in the details of such a commercial real estate setup. Maintaining that separateness is made much easier if the business seeks out the counsel of an experienced, aggressive law firm.

Commercial Real Estate and Business Attorneys in Milwaukee

Commercial real estate law, like corporate law itself, is complex and can be fraught with difficulty. Careful attention to detail is important. It is vital that the corporate operations be documented and reviewed by counsel to achieve your goals of protecting your important commercial assets. If you have concerns about your enterprise’s current structure and operations, perhaps it’s time to contact a skilled, experienced attorney who can help you maneuver within what can seem to be a legal maze. The Milwaukee business litigation firm of Kerkman Wagner & Dunn has more than 50 years of combined legal experience representing landlords, property owners, and all types of business concerns in Wisconsin. Our firm has big firm talent and provides small firm attention. Call us at 414-278-7000 or complete our online contact form.